Gold bulls retreat as higher prices deter jewelers

Gold supply from recycled materials may fall as much as 25% in 2013 from 1,600 metric tons in 2012 as this year’s slump, set to be the biggest since 1997, deters holders from selling the metal, Marcus Grubb, managing director of investment research at the World Gold Council in London, said in an interview this week. Central banks will add about another 400 tons to gold reserves this year after buying almost 535 tons last year, the most since 1964, he said.

The central-bank buying won’t be enough to prevent further declines, Goldman Sachs Group Inc. wrote in a July 24 report. Prices will probably trade near $1,300 until the end of this year before dropping to $1,050 by December 2014 on a stronger U.S. economy and reduced monetary policy, the bank estimates.

Price Declines

Bullion fell in eight of the previous nine months because the unprecedented money printing by central banks that helped push U.S. equities to a record failed to spur inflation. Gold will slip to $1,200 by the end of September, averaging $1,000 next year and $840 in 2015, ABN Amro Group NV said yesterday.

“The demand from the physical side is not enough to be able to support prices,” said Nicholas Thompson, executive director at Morgan Stanley Wealth Management. “A stronger dollar coupled with the strength in the equity market and higher real interest rates will keep a cap on gold prices. There is no real catalyst for prices to rise.”

Hedge funds and other large speculators cut bets on higher prices by 72% since October, holding a net-long 55,535 contracts on July 16, U.S. Commodity Futures Trading Commission data show. Bullish wagers reached a six-year low of 31,197 contracts on June 25. Investors sold 662 tons from ETPs this year, wiping $57.5 billion from the value of the funds, data compiled by Bloomberg show. Holdings reached 1,969.88 tons on July 25, the lowest in more than three years.

Mining Companies

Billionaire John Paulson owns the largest stake in the SPDR Gold Trust, the biggest bullion ETP. His PFR Gold Fund slid 23% in June, extending this year’s loss to 65%. The slump is also hurting miners. Newcrest Mining Ltd., Australia’s top gold producer, said in June it will write down the value of its assets by as much as A$6 billion ($5.5 billion).

Gold dropped below the level that some producers need to break even this year, leading some banks, including UniCredit SpA, to anticipate contracting supply in the next several years that may help halt the retreat. Credit Suisse Group AG forecasts prices will average $1,180 next year and $1,200 in 2015, and predicts a long-term price of $1,300.

The slump of as much as 39% from the 2011 all-time high is less than the 65% plunge in the 2 1/2 years following the then-record price of $850 set in January 1980. Former U.S. President Richard Nixon severed the dollar peg to gold in 1971 and the government lifted curbs on citizens owning gold at the end of 1974.